Tax savings make 2020 ‘a watershed year for the company car’

Businesses and company car drivers can save thousands of pounds by replacing petrol and diesel models with electric vehicles from April 2020 – and simultaneously reduce their carbon footprint.

Calling April 2020 “a watershed moment for the company car”, professional services firm Deloitte calculates total cost of ownership (TCO) savings of “in the region of 21-25%” for employers and company car benefit-in-kind tax savings of “around 95%” for employees over a four-year operating cycle.

The potential impact for employers could trigger savings running into millions of pounds depending on the size of a fleet. For example, Deloitte calculates that a company operating a 900-strong fleet – 600 medium-sized hatchbacks and 300 premium SUVs – could save £1.9 million a year with total savings of £7.7 million over four years if going 100% electric. For a smaller fleet – 35 medium-sized hatchbacks and 15 premium SUVs – the savings could be £100,000 a year (see table below).

The cost of financing an electric car can be higher than an internal combustion engine equivalent, acknowledges Deloitte. However, it highlights that company savings can be made in Class 1A National Insurance contributions, which are based on employees’ benefit-in-kind, fuel/electricity and Corporation Tax relief.

For employees the major savings, which Deloitte described as “compelling”, come from new company car benefit-in-kind tax rates that are effective from April 2020 as well as from savings on fuel/electricity when compared with petrol or diesel.

For electric cars, rates are being slashed from 16% in 2019/20 to 0% in 202021, 1% in 2021/22 and 2% in 2022/23. Rates beyond that date have yet to be published so Deloitte, in making its calculations, has rolled forward the 2% rate to include 2023/24. However, even if rates for electric vehicles were to increase significantly in 2023/24 alongside a small rise in those for petrol and diesel models, it is understood that there would continue to be a similar financial benefit to drivers and businesses.

Deloitte calculates, for example, that a 40% taxpayer driving a diesel hatchback company car with a list price of £30,000, could currently expect to pay more than £18,000 in benefit-in-kind tax and fuel costs over a 48-month period. By comparison, for a comparable electric vehicle, the total cost of ownership reduces to £916; a saving of 95% or more than £17,000 (see table below).

What’s more, even if 100% electric cars are not viable for a business and its employees, Deloitte highlights that significant benefit-in-kind tax savings can still be made by selecting plug-in hybrid models as company cars.

Michael Woodward, UK automotive lead at Deloitte, said: “We’ve seen electric vehicle popularity increase fourfold over the past year alone. For those thinking about making the switch, the tax changes for company cars from April 6, 2020 are certainly a strong incentive.”

Forecasting a surge in demand, Mr Woodward said the key question was whether both motor manufacturers and businesses were ready with analysis of the existing fleet and company car policies critical for the latter.

He continued: “Over the next three years, car manufacturers will need to review the scale of their production to accommodate growth and assess supply levels into the UK. Fleet sales will drive the majority of demand and manufacturers will be keen to prevent missing out on sales due to lack of supply.

“For many businesses, there are operational, employee and environmental benefits in transitioning to electric vehicles. However, the suitability of electric must make sense before making the switch.

“For some, electric vehicles will already be a viable option given their fleet journey patterns, and next steps may simply be building a robust policy and plan to support wider adoption. For others, long-distance travel demands or knowing how and where to charge electric vehicles will need more consideration. Businesses upgrading from diesel or petrol fleets may also require investment for on-site charge points.

“Environmentally, transport is the highest carbon emitting sector in the UK and targeting corporate fleets in this way has the potential to displace the maximum amount of fossil-driven miles.”

Employer perspective

The table below assumes a 48-month replacement cycle and travelling 10,000 business and 10,000 private miles per year, for a business providing an electric or diesel version of a medium hatchback with a list price of around £30,000, or a premium SUV with a list price of around £70,000.

Total cost of ownership* (48 months)

Medium hatch

Premium SUV

Electric

£21,393

£43,121

Diesel

£27,139

£57,529

Saving achieved

£5,746

£14,408

Saving achieved as a percentage

21%

25%

* The employer TCO includes the cost of lease rentals, maintenance, motor insurance, social security and business mileage reimbursement. The TCO shown is after recovery of any applicable VAT reclaims as well as applicable corporation tax relief. The TCO is the cost over the complete 48-month replacement cycle and also reflects any future changes in tax rules that are known at this point.

Employee perspective

The table below assumes a 48-month company car replacement cycle and travelling 10,000 business and 10,000 private miles per year, for an electric or diesel version of a medium hatchback with a list price of around £30,000, or a premium SUV with a list price of around £70,000.

Total cost of ownership* (48 months)

Medium hatch

Premium SUV

Electric

£916

£1,639

Diesel

£18,006

£49,036

Electric company car saving

£17,090

£47,397

Saving achieved as a percentage

95%

97%    

*The employee TCO includes the cost of company car benefit-in-kind tax, the cost of fuel for business and private mileage, less any business mileage reimbursement received. The TCO is the cost over the complete 48-month replacement cycle and also reflects any future changes in tax rules that are known at this point.

Source: Deloitte analysis 2019.

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